I’m scheduled to be on the Neil Cavuto show from 6:10 to 6:15 tonight. I’m told Neil wants to talk about two things — why oil surged today and why Iran needs nuclear power when it has so much oil and natural gas.
Why Oil Went Up
Oil’s rise today had nothing to do with consumer demand, at least here in the U.S. American demand is down year over year. It’s mostly a U.S. dollar story.
Oil is the anti-dollar. Traders are very worried the Chinese will abandon the dollar. They are buying oil to hedge against a potential dollar decline. They know the Chinese will use oil.
- Chinese oil demand is rising (unlike U.S. oil demand), and is the other part of the oil story. Chinese oil demand grew 4% during the month of April.
- The Chinese are stockpiling oil. On Tuesday, it was reported that China’s total oil stocks ended at 270.2 million barrels- up 7 million barrels from March to April, even though consumption increased during the same period. Down the road, the Chinese will stockpile even more oil, increasing the size of its strategic oil reserves eventually up to a 90-day supply.
- Implied demand for gasoline, the dominant fuel for passenger cars, jumped over 13 percent in April from the month before, far outpacing the overall 4 percent rise in oil use. China’s vehicle sales rose 9.4 percent to 3.83 million in the first four months of this year, indicating Chinese gasoline sales are going to rise even faster. Meanwhile, U.S. vehicle sales fell 37 percent to 3 million units.
Why Iran Needs Nukes
The source of much of the following is the Energy Information Adminstration webpage on Iran:
According to Oil and Gas Journal, as of January 2009, Iran has an estimated 136.2 billion barrels of proven oil reserves, or roughly 10 percent of the world’s total proven petroleum. In 2007, Iran exported about 2.4 million barrels per day (bpd) of oil, primarily to Asian and OECD Europe countries, making it the fourth largest exporter in the world. HOWEVER, due to the lavish consumption of heavily subsidized fuel by Iranian drivers, the country cannot meet the domestic gasoline needs, and is forced to import large amounts which it then sells very cheaply at the pump, burdening the budget.
Iran produced 6 million barrels per day of crude oil in 1974, but has been unable to produce at that level since the 1979 revolution due to a combination of war, limited investment, sanctions, and a high rate of natural decline in Iran’s mature oil fields. Iran’s fields have a natural annual decline rate estimated at 8 percent onshore and 11 percent offshore, while current Iranian recovery rates are 20-25 percent. It is estimated that 400,000-700,000 bpd of Iran’s crude production is lost annually due to declines in the mature oil fields.
Bottom line: Iran’s domestic oil use is ramping up. The country can’t refine enough gasoline and actually has to ration it. The Iranian government officials believe that rationing is essential to curb rising consumption and help reduce reliance on expensive gasoline imports.
It needs nuclear power to reduce domestic consumption of oil and natural gas for electricity, thereby freeing up more for export, so Iran can balance its budget.
XX Sean’s note — I don’t think we’ll be able to cover one-tenth of this in five minutes. So, we’ll see. Neil is always a gracious host. Let’s just hope I don’t get bumped like last time.
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